General Insurance Concepts

Question 1

Agent/Producer

Answer 1

a legal representative of an insurance company; the classification of producer usually includes agents and brokers; agents are the agents of the insurer

Question 2

Applicant or proposed insured

Answer 2

a person applying for insurance

Question 3

Broker

Answer 3

an insurance producer not appointed by an insurer and is deemed to represent the client

Question 4

Indemnity

Answer 4

main principle of insurance, meaning that the insured cannot recover more than their loss; the purpose of insurance is to restore the insured to the same position as before the loss

Question 5

Law of large numbers

Answer 5

the larger the number of people with a similar exposure to loss, the more predictable actual losses will be

Question 6

Reciprocity/Reciprocal

Answer 6

a mutual interchange of rights and privileges

Question 7

Insurance

Answer 7

the transfer of risk of loss. The cost of an insured’s loss is transferred over to the insurer and spread among other insureds.

Question 8

Risk

Answer 8

the uncertainty or chance of a loss occurring. The two types of risks are pure and speculative, only one of which is insurable.

Question 9

Pure risk

Answer 9

situations that can only result in a loss or no change. There is no opportunity for financial gain. Pure risk is the only type of risk that insurance companies are willing to accept.

Question 10

Speculative risk

Answer 10

involves the opportunity for either loss or gain. An example of speculative risk is gambling. These types of risks are not insurable.

Question 11

Hazards

Answer 11

conditions or situations that increase the probability of an insured loss occurring. Hazards are classified as physical hazards, moral hazards, or morale hazards. Conditions such as lifestyle and existing health, or activities such as scuba diving, are hazards and may increase the chance of a loss occurring.

Question 12

Physical hazards

Answer 12

individual characteristics that increase the chances of the cause of loss. Physical hazards exist because of a physical condition, past medical history, or a condition at birth, such as blindness.

Question 13

Moral hazards

Answer 13

tendencies towards increased risk. Moral hazards involve evaluating the character and reputation of the proposed insured. Moral hazards refer to those applicants who may lie on an application for insurance, or in the past, have submitted fraudulent claims against an insurer.

Question 14

Morale hazards

Answer 14

similar to moral hazards, except that they arise from a state of mind that causes indifference to loss, such as carelessness. Actions taken without a forethought may cause physical injuries.

Question 15

Perils

Answer 15

causes of loss insured against in an insurance policy.

Question 16

Loss

Answer 16

the reduction, decrease, or disappearance of value of the person or property insured in a policy, caused by a named peril. Insurance provides a means to transfer loss.

Question 17

Methods of Handling Risk

Answer 17

Sharing, Transfer, Avoidance, Retention, Reduction

Question 18

What are the five characteristics of an ideally insurable risk?

Answer 18

Loss must be 1) due to chance, 2) definite and measurable, 3) statistically predictable, 4) not catastrophic, and 5) Coverage cannot be mandatory.

Question 19

When does an insurance policy go into effect?

Answer 19

When the policy is delivered and the premium is paid

Question 20

For the purpose of insurance, what is risk?

Answer 20

Uncertainty of loss

Question 21

Pure risk

Answer 21

A situation in which a person can only experience a loss and no gain presents what type of risk?

Question 22

What entities make up the Medical Information Bureau?

Answer 22

Insurers

Question 23

When agents act within the scope of their contract, their actions will be assumed to be the acts of whom?

Answer 23

Insurer

Question 24

What is a warranty in an insurance contract?

Answer 24

An absolutely true statement upon which the validity of the insurance contract is based

Question 25

What type of insurer is formed under the laws of another country?

Answer 25

Alien

Question 26

If an agent fails to obtain the applicant’s signature on the insurance application, what must the insurer do?

Answer 26

Send the application back to the applicant for signature

Question 27

Whose responsibility is it to determine that all the questions on an insurance application are answered?

Answer 27

The agent’s

Question 28

The requirement that agents must account for and promptly remit all insurance funds collected is knows as what type of agent responsibility?

Answer 28

Fiduciary

Question 29

An insurance company is domiciled in California and transacts insurance in Nevada. What is this insurer’s classification in Nevada?

Answer 29

Foreign

Question 30

In the agent/insurer relationship, who is considered the principal?

Answer 30

Insurer

Question 31

What do individuals use to transfer their risk of loss to a larger group?

Answer 31

Insurance

Question 32

If an insurer meets the state’s financial requirements and is approved to transact business in the state, it is considered what type of insurer?

Answer 32

Authorized or admitted

Question 33

In insurance, when is the offer usually made on a contract?

Answer 33

When the insurance application is submitted

Question 34

What are the four elements of an insurance contract?

Answer 34

Agreement (offer and acceptance), consideration, competent parties, and legal purpose